Q3 2017 Flow of Funds

In nominal dollars, Total U.S. System (Non-Financial, Financial and Foreign) borrowings expanded $1.007 TN during the third quarter to a record $68.012 TN. Total Non-Financial Debt (NFD) rose a nominal $732 billion during the quarter to a record $48.635 TN. It's worth noting that NFD has expanded 46% since ending 2007 at $33.26 TN.

Total Non-Financial Debt expanded a seasonally-adjusted and annualized rate (SAAR) of $2.954 TN during Q3, the strongest Credit growth since Q4 2015. As has often been the case over the past nine years, Washington led the Credit expansion. Federal borrowings jumped to SAAR $1.656 TN, the strongest in seven quarters. Total Business borrowings expanded SAAR $751 billion, up from Q2's $692 billion. Total Household debt growth slipped slightly q/q to $550 billion.

On a percentage basis, Non-Financial Debt expanded at a 6.2% rate during Q3, accelerating from Q2's 3.8%, Q1's 1.7% and Q4 2016's 3.1%. Federal borrowings grew at a 10.3% pace, Total Business at 5.4% and Total Household debt expanded at 3.7%.

To the naked eye, percentage debt growth figures for the most part don't appear alarming. But there's several unusual factors to keep in mind. First, the outstanding stock of debt has grown so enormous that huge Credit expansions (such as Q3's) don't register as large percentage gains. Second, overall system debt growth continues to be restrained by historically low interest-rates and market yields. Debt simply is not being compounded as it would in a normal rate environment. And third, it's a global Bubble and a large proportion of global Credit growth is occurring in China, Asia and the emerging markets. U.S. securities markets continue to a big target of international flows.

With global Bubble Dynamics a dominant characteristic of this cycle, it's appropriate to place Rest of World (ROW) data near the top of Flow of Funds analysis. ROW holdings of U.S. Financial Assets jumped $724 billion (nominal) during the quarter to a record $26.347 TN. This puts growth over the most recent three quarters at a staggering $2.124 TN (16% annualized). What part of these flows has been associated with ongoing rapid expansion of global central bank Credit? It's worth recalling that ROW holdings ended 2007 at $14.705 TN and 1999 at $5.639 TN. As a percentage of GDP, ROW holdings of U.S. Financial Assets ended 1999 at 57%, 2007 at 100%, and Q3 2017 at a record 135%.

Meanwhile, the Fed's Domestic Financial Sectors category expanded assets SAAR $2.841 TN during Q3 to a record $95.213 TN. In nominal dollars, the Financial Sector boosted assets a notable $5.085 TN over the past three quarters, almost 8% annualized growth. Notably, the sector's holdings of Debt Securities surged a nominal $775 billion in three quarters to a record $25.425 TN. Pension Funds were a huge buyer of Treasuries during the quarter (SAAR $1.075 TN). Over the past three quarters, the Financial Sector boosted holdings of Corporate & Foreign Bonds by nominal $427 billion to $8.026 TN. More big numbers.

Banks ("Private Depository Institutions") expanded loan portfolios by SAAR $509 billion during Q3, the strongest expansion in a year. I still see analysis referring to tepid bank lending. And while loan growth has appeared less than boom-like, at least part of this is explained by booming capital markets. Corporate bond issuance has remained near record pace, and there has been as well even a surge in Open Market Paper ("commercial paper") borrowings.

One doesn't have to look much beyond the booming Rest of World and Domestic Financial Sector to explain ongoing over-liquefied securities markets. The numbers confirm a historic financial Bubble.

Total Equities Securities jumped $1.229 TN during the quarter to a record $43.969 TN, with a one-year gain of $5.923 TN (16.4%). Equities jumped to a record 224% of GDP, compared to 181% at the end of Q3 2007 and 202% to end 1999. Debt Securities gained $171 billion during Q3 to a record $42.385 TN, with a one-year gain of $1.080 TN. At 217% of GDP, Debt Securities remain just below the record 223% recorded in 2013.

This puts Total (Debt & Equities) Securities up $1.400 TN during the quarter to a record $86.080 TN. Total Securities inflated $7.003 TN, or 9.1%, over the past year. Total Securities experienced cycle tops of $55.261 TN during Q3 2007 and $36.017 TN to end March 2000. Total Securities ended Q3 2017 at a record 441% of GDP. This outshines the previous cycle peaks of 379% for Q3 2007 and 359% at Q1 2000. One more way to look at post-crisis securities market inflation: Total Securities ended Q3 $30.819 TN, or 56%, higher than the previous cycle peak in Q3 2007.

There's no doubt that financial sector leveraging and foreign flows (especially through the purchase of U.S. securities) continue to play an integral role in the U.S. Bubble. Inflating asset prices and resulting bubbling U.S. Household Net Worth are instrumental in fueling the overall U.S. Bubble Economy.

Household Assets inflated $1.920 TN during Q3 to a record $112.360 TN. And with Household Liabilities little changed at $15.241 TN, Household Net Worth expanded $1.922 TN during the quarter to a record $97.119 TN. Household Net Worth ended September at a record 498% of GDP. This is up from the 378% Q1 2009 trough level. It also surpasses the cycle peaks of 478% back in Q1 2007 and 435% in Q4 1999.

For the quarter by Household Asset category, Financial Asset holdings increased $1.449 TN to a record $78.854 TN. Real Estate holdings gained $411 billion to a record $27.428 TN. Household Net Worth increased $7.389 TN over the past year and $11.870 TN over two years. Household Net Worth has now increased 78% from Q1 2009 lows.

As we think ahead to 2018, the question becomes how vulnerable U.S. securities markets are to waning QE and reduced central bank Credit expansion. Inflating a Bubble creates vulnerability to any slowdown in underlying Credit and attendant financial flows. And it's the final parabolic speculative blow-off that seals a Bubble fate. It ensures market dependency to unusually large and inevitably unsustainable flows. The Fed's latest Z.1 report does a nice job of illuminating the historic scope of the U.S. securities Bubble. U.S. securities markets have been on the receiving end of extraordinary international flows, while inflating securities and asset prices have spurred rapid financial sector expansion.

The U.S. dollar index gained 1.1% to 93.901 (down 8.3% y-t-d). For the week on the upside, the South African rand increased 0.5%. For the week on the downside, the Swiss franc declined 1.7%, the Mexican peso 1.6%, the Australian dollar 1.4%, the Canadian dollar 1.3%, the Japanese yen 1.2%, the Swedish krona 1.1%, the Brazilian real 1.1%, the euro 1.0%, the South Korean won 1.0%, the British pound 0.7%, the New Zealand dollar 0.6%, the Singapore dollar 0.5% and the Norwegian krone 0.1%. The Chinese renminbi was little changed versus the dollar this week (up 4.90% y-t-d).

December 2 - Wall Street Journal (Richard Rubin and Siobhan Hughes): "The Senate passed sweeping revisions to the U.S. tax code past midnight Saturday after Republicans navigated a thicket of internal divisions over deficits and other issues to place their imprint on the economy. The bill, which included about $1.4 trillion in tax cuts, would lower the corporate rate to 20% from 35%, reshape international business tax rules and temporarily lower individual taxes. It also touched other Republican goals, including opening the Arctic National Wildlife Refuge to oil drilling and repealing the mandate that individuals purchase health insurance, which would punch a sizable hole in the 2010 Affordable Care Act. But some objectives, such as repealing the alternative minimum tax, fell by the wayside in last-minute wrangling."

December 7 - Bloomberg (Toluse Olorunnipa): "Lawmakers have made -- and then retracted -- pledges that their planned overhaul bill wouldn't raise taxes on any middle-class families. Trump and his top aides have said the changes won't cut taxes for the highest earners, statements that are demonstrably false. And all of them argue that the proposed tax cuts, estimated to reduce federal revenue by more than $1.4 trillion, won't increase federal deficits, an assertion that's been contradicted by Congress's official tax scorekeeper. 'The challenge is that there were a lot of promises made that can't live comfortably with each other,' said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget. 'The biggest loser in all this was their commitment to fiscal discipline, which went away as fast as you can blink.'"

December 4 - Financial Times (Ed Crooks): "Planned changes to the US tax system threaten to cut sharply the value of business tax credits used to encourage research and development and other investment spending, sparking protests from the technology industry. As Republicans in the Senate sought to limit the cost of their tax bill shortly before voting to approve it at 2am on Saturday, they decided to retain the corporate Alternative Minimum Tax, which sets a limit on how far companies can use credits to reduce their tax bills. The threat to the value of the credits has emerged as one of many potential unintended consequences of a wholesale upheaval of the tax system that is passing through Congress at speed."

December 4 - Wall Street Journal (Theo Francis and Richard Rubin): "Technology, banking and other industries mounted a new round of lobbying Monday to save a wide range of tax breaks following the last-minute switch in the federal tax overhaul by the U.S. Senate. The Senate on Saturday decided to keep a corporate alternative minimum tax, or AMT, a move that gave the senators $40 billion over a decade to use on other priorities... The move blindsided CEOs and business groups, who acted quickly on Monday to try to persuade legislators to kill or modify the provision..."

December 5 - Wall Street Journal (Richard Rubin and Siobhan Hughes): "Though the House and Senate have voted to repeal the deduction for state income taxes in Republican tax overhaul plans, it isn't dead yet. California Republicans are pushing for an income-tax deduction in the final tax bill being worked out by lawmakers in a House-Senate conference committee on tax legislation. 'There's a lot of things that Californians are working on and why we said we'd move the process forward, looking to be able to make those fixes,' House Majority Leader Kevin McCarthy (R., Calif.) told reporters... In November, 11 of the 14 California Republicans in the House voted for the tax bill; New Jersey and New York GOP members, with similarly high state taxes, were much more willing to vote no. The House will need to vote again, and Republicans need 217 votes to guarantee passage if no Democrats vote for the bill."

December 7 - Wall Street Journal (Siobhan Hughes): "Family-owned businesses including grocery stores, craft shops, small manufacturers and others are worried tax legislation in Congress could leave them at a disadvantage to big corporations and other competitors. At issue for these businesses is their structure as trusts, established to preserve an enterprise for succeeding generations, protect against estate taxes or a divorcing spouse or other claimants who might try to seize a stake. Some family-owned firms say the Senate version of the tax bill holds risks for them because it excludes trusts from a new tax deduction. Family-owned businesses are a slice of the universe of 'pass through' companies—partnerships, limited liability companies and S Corporations—that pay taxes through individual rather than corporate returns."

December 4 - Financial Times (Sam Fleming): "Even as US stocks roared higher on Monday in response to the passage of the Senate tax bill many analysts were expressing deep scepticism about the notion that the overhaul will transform an economy that is already running close to full employment. Kent Smetters, a former Bush administration official who oversees the Penn Wharton Budget Model, said he expects at most a 0.1 percentage point uplift to annual growth rates over the course of 10 years as a result of the legislation. The long-run impact on trend growth will be negligible, he added, as the extra debt amassed as a result of lost revenue weighs on the economy. 'It is not a significant boost,' he said."

December 6 - Reuters (Daniel Flynn and Aluisio Alves): "Proposed U.S. tax cuts would increase the federal deficit and looser fiscal policy could prompt negative action on U.S. credit ratings unless Washington addresses long-term budgetary issues, the head of sovereign ratings at S&P Global said... While Congress has yet to agree upon a final version of the tax package, Moritz Kraemer, S&P's sovereign global chief rating officer, told Reuters... that the cuts appeared more likely to stoke inflation rather than significantly boost growth in a U.S. economy already running at full capacity."

China Watch:

December 6 - Reuters (Yen Nee Lee): "An almost two-year long study of the Chinese financial system by the International Monetary Fund found three major tensions that could derail the world's second-largest economy. Those tensions emerged as China moves away from its role as the world's factory to a more modern, consumer-driven economy, the IMF said. The financial sector is critical in facilitating that transition, but in the process it evolved into a more complicated and debt-laden system. 'The system's increasing complexity has sown financial stability risks,' the fund said in the 2017 China Financial Sector Stability Assessment report... The first tension in China's financial system... is the rapid build-up in risky credit that was partly due to the strong political pressures banks face to keep non-viable companies open, rather than letting them fail... The overall debt-to-GDP ratio in the Asian economic giant grew from around 180% in 2011 to 255.9% by the second quarter of 2017... The second tension identified by the IMF is that risky lending has moved away from banks to the less-regulated parts of the financial system, commonly known as the 'shadow banking' sector... And the third issue identified by the international organization is that there's been a rash of 'moral hazard and excessive risk-taking' because of the mindset that the government will bail out troubled state-owned enterprises and local government financing vehicles..."

December 4 - Reuters (Engen Tham, Claire Jim and Yawen Chen): "Gravity-defying property prices in China have spawned widespread home-loan fraud as buyers fear missing out on what seems like a sure bet. Real estate agents, valuation companies and banks themselves are party to the scam. When Zhu Chenxia bought a flat early last year from Lei Yarong in the up-market Nanshan district of China's southern metropolis of Shenzhen, the two women drew up three purchase agreements to cover the deal. Only one was genuine. In the legitimate contract, Zhu agreed to pay Lei 6.49 million yuan (about $980,000) for the 96-square-meter apartment near the city's border with Hong Kong... With the help of her property agent, Zhu cooked up a second contract with Lei that overstated the value of the flat at 7 million yuan. This one was for the bank. If Zhu had presented her lender with the true purchase price, she would only have been entitled to borrow up to 70% of that amount... Chinese regulations stipulate that first-home buyers in some major cities must make a down payment of at least 30%..."

December 4 - Bloomberg: "Units of HNA Group Co. are stepping up fundraising in the local bond market even as borrowing costs soar, adding to concerns about the Chinese conglomerate's debt burden. Yunnan Lucky Air Co., a unit of Hainan Airlines Holding Co. -- HNA's flag carrier -- sold a 270-day yuan bond to yield 8.2% last week, the highest coupon rate ever for the Yunnan airline. Tianjin Airlines Co., another subsidiary of Hainan Airlines, issued similar-maturity notes at the highest coupon rate in five years in November. While surging onshore bond yields last month forced Chinese companies to cancel the most bond offerings since April, HNA's units didn't slow their pace of financing... The accelerated fundraising suggests a need for money and may hurt the conglomerate's credit profile, according to credit research firm Bondcritic Ltd."

December 6 - Bloomberg: "HNA Group Co., one of China's most indebted companies, is facing increasing difficulties raising funds as scrutiny mounts over the acquisitive conglomerate's surging borrowing costs. In the past week, S&P Global Ratings and Fitch Ratings have voiced concerns about at least four companies because of their ties with HNA. Separately, group flagship Hainan Airlines Holding Co. canceled a bond sale, another unit scrapped a share offering and HNA subsidiaries have been paying some of their highest borrowing costs ever. The setbacks add to the pressures piling up at the largest shareholder of Deutsche Bank AG as the Chinese conglomerate stares at about $28 billion in short-term debt at a time the company is unable to earn enough profits to cover its interest payments."

December 8 - Bloomberg: "China's trade engine remained in high gear with a surprise export surge accompanied by further acceleration in imports that signals robust demand in the domestic economy. Exports rose 12.3% in November in dollar terms, the customs administration said Friday, exceeding all economist estimates in a Bloomberg survey where the median estimate was for a 5.3% rise. Imports also beat projections with a 17.7% increase, widening the trade surplus to $40.2 billion."

December 2 - Reuters (Andrew Galbraith): "China's Ministry of Commerce (MOFCOM) has expressed 'strong dissatisfaction and firm opposition' to a statement by the United States to the World Trade Organization (WTO) that it opposes granting China market economy status, Xinhua reported... The U.S. and the European Union argue that Beijing's pervasive role in the Chinese economy distorts and prevents market determination of domestic prices."

December 6 - Bloomberg: "China's banks should increase their capital buffers to protect against any sudden economic downturn following a credit boom, the International Monetary Fund said. In its first comprehensive assessment of China's financial system since 2011, the IMF recommended 'a gradual and targeted increase in bank capital.' In a worst-case scenario, IMF stress tests suggested the country's lenders would face a capital shortfall equivalent to 2.5% of China's gross domestic product -- about $280 billion in 2016 -- together with ballooning soured loans. Overall, 27 of 33 banks stress-tested by the fund, covering about three quarters of China's banking-system assets, were under-capitalized by at least one measure."

December 6 - CNBC (Evelyn Cheng): "China's private fund industry is growing rapidly as the country's wealthy increasingly turn toward money managers. Assets under management of Chinese private funds rose 28% over the first 10 months of the year, to 10.77 trillion yuan ($1.63 trillion)... The funds target high-net-worth individuals, a group that has grown rapidly in China. The number of Chinese with at least 10 million yuan (roughly $1.5 million) in investible assets has multiplied more than eight times within a decade, to 1.6 million in 2016..."

Federal Reserve Watch:

December 1 - Wall Street Journal (Nick Timiraos): "A top Federal Reserve official said that he sees a 'reasonable case' to raise short-term interest rates this month and that any new fiscal stimulus approved by lawmakers in Washington could shape the central bank's expectations for additional rate increases next year. New York Fed President William Dudley said... that any effort to make the tax code less complex 'makes sense.' But with the economy expanding solidly and the unemployment rate at a low level of 4.1%, Fed policy makers will be watching closely to see whether any tax changes might cause the economy to overheat. 'It would be a reasonable question to ask, is this the best time to apply fiscal stimulus, when the economy's already close to full employment?' he said. 'It's probably not the best time.'"

U.S. Bubble Watch:

December 6 - Wall Street Journal (Eli Stokols): "John Della Volpe, who has been polling millennials for 17 years, stood before about 150 students in a gleaming new center at Elon University this fall in search of an answer. In his 2016 survey for Harvard University's Institute of Politics, 42% of younger Americans said they support capitalism, and only 19% identified themselves as capitalists. While this was a new question in his survey, the low percentage of young people embracing capitalism surprised him... 'Maybe it had to do with the 'American Dream,' and how capitalism was correlated with it, but a lot of young people don't believe in it anymore,' said Ana Garcia, a junior at the Elon event. 'We don't trust capitalism because we don't see ourselves getting ahead.'"

December 5 - Bloomberg (Sho Chandra): "The U.S. trade deficit widened in October to a nine-month high on record imports that reflect steady domestic demand... Gap increased 8.6% to $48.7b (est. $47.5b) from revised $44.9b in prior month that was wider than previously reported."

December 5 - CNBC (Jeff Cox): "A market that already has broken a multitude of records is about to set another one — this time for cash poured into stock-based funds. Equity exchange-traded funds are on track to pull in $300 billion this year, after another solid showing in November. The month saw $30.6 billion in inflows, taking the running total for 2017 up to just shy of $294 billion, according to State Street... For perspective, that would bring the total inflows for stock-based ETFs alone to more than the entire $3.4 trillion industry has ever taken in during a year. A market that has seen 64 record closing highs for the Dow industrials is also seeing plenty of participation from investors."

December 7 - Wall Street Journal (Bradley Olson and Lynn Cook): "Twelve major shareholders in U.S. shale-oil-and-gas producers met this September in a Midtown Manhattan high-rise with a view of Times Square to discuss a common goal, getting those frackers to make money for a change. In the months since, shareholders have put the screws to shale executives in ways that are changing the financial calculus of hydraulic fracturing and could ripple through the global oil market. In the past decade, the shale-fracking revolution has made the U.S. the world's largest oil-and-gas producer and reshaped markets. Yet shale has been a lousy bet for most investors. Since 2007, shares in an index of U.S. producers have fallen 31%..., while the S&P 500 rose 80%. Energy companies in that time have spent $280 billion more than they generated from operations on shale investments, according to... Evercore ISI."

December 7 - Bloomberg (Matthew Boesler): "Blame Corporate America for a reluctance to invest. Small businesses aren't holding back. Capital expenditures by non-financial, non-corporate U.S. businesses -- typically smaller firms -- rose to 2.35% of gross domestic product in the third quarter, the most since 1989, according to... the Federal Reserve. Meanwhile, larger companies are only investing to the tune of 9.15% of GDP -- well below levels that prevailed in the previous two expansions, and even earlier in this expansion."

December 4 - Bloomberg (Rachel Evans, Sabrina Willmer, Nick Baker, and Brandon Kochkodin): "Imagine a world in which two asset managers call the shots, in which their wealth exceeds current U.S. GDP and where almost every hedge fund, government and retiree is a customer. It's closer than you think. BlackRock Inc. and Vanguard Group — already the world's largest money managers — are less than a decade from managing a total of $20 trillion, according to Bloomberg News calculations. Amassing that sum will likely upend the asset management industry, intensify their ownership of the largest U.S. companies and test the twin pillars of market efficiency and corporate governance. None other than Vanguard founder Jack Bogle, widely regarded as the father of the index fund, is raising the prospect that too much money is in too few hands, with BlackRock, Vanguard and State Street Corp. together owning significant stakes in the biggest U.S. companies."

December 5 - Wall Street Journal (Dana Mattioli, Anna Wilde Mathews and Nathan Becker): "Aetna Inc. Chief Executive Mark T. Bertolini is set to pocket roughly half a billion dollars when he leaves his company if it successfully merges with CVS Health Corp. If the $69 billion deal between the pharmacy chain and health insurer goes through, Mr. Bertolini stands to reap a generous exit payment and benefit from a sizable increase in the value of the stock and rights he owns... His combined payout is expected to be about $500 million... Most of Mr. Bertolini's projected payout is tied to stock or rights he already held that jump in value with the deal. At the agreed-upon $207-a-share deal price, more than $230 million is expected to come from already-vested stock-appreciation rights Mr. Bertolini holds for Aetna shares."

Central Banker Watch:

December 4 - Nikkei Asian Review (Tatsuya Goto): "The Bank of Japan is slowing the supply of money, arousing speculation that it is paving the way for a trimming of its ultra-easy monetary policy. The supply of funds to the market in November showed an increase of 51.7 trillion yen ($458bn), effectively the smallest annual pace of growth since the BOJ introduced easing of 'a different dimension' in April 2013. The central bank is steadily shifting the focus of its easing policy to controlling interest rates, away from 'quantitative' measures, as prices have doggedly refused to rise."

Global Bubble Watch:

December 6 - Financial Times (Joe Rennison): "The difference between short-dated and longer-dated US Treasury yields has narrowed at its fastest pace since 2008, as investors anticipate a quicker rate of policy tightening from the Federal Reserve next year. The difference between two- and 10-year yields has fallen 33 bps to just 52 bps over the past 30 days, while the difference between five- and 30-year yields has fallen 34 bps, surpassing declines prompted by the European sovereign debt crisis in 2011 and reaching a pace last seen during the financial crisis, according to analysts at Citi."

December 5 - Financial Times (John Plender): "Ten years after the crisis, volatility and fear have disappeared from markets. A synchronous global expansion coupled with persistently loose monetary policy produced a Goldilocks era for asset prices, culminating in fantastic returns in 2017. Will it last for another year? The short answer is: we have reasons to be cautious. Several macro analysts have called this an environment of rational exuberance. Volatility and asset prices are justifiably low, they say, given healthy macroeconomic conditions. Instead, we believe markets may be in a period of irrational complacency. The signs are widespread. Yields on European junk bonds have fallen below US Treasuries. Emerging market countries with a history of default, such as Argentina, have issued 100-year bonds. Facebook, Amazon, Apple, Netflix and Snapchat together are worth more than the whole German Dax. Banks are again marketing CDOs. Cash-park assets including property, art, collectibles and cryptocurrencies are soaring in a parabolic fashion, like life rafts in a sea of central bank liquidity. Not only have asset prices soared, volatility is at rock bottom too: the S&P 500 index just experienced the lowest amount of swings in the last 50 years."

December 3 - Bloomberg (Mariko Ishikawa and Annie Lee): "It's been a borrower's market for a long time, in Asian syndicated loans as in the rest of the dollar universe. But Asia-Pacific lenders are facing increasing funding pressures, and a handful are aiming to pass those costs along -- in another sign that the beginning of the end of ultra-easy money may be coming. Half of the 50 banks in a Bloomberg News survey have experienced an increase in funding cost of as much as 20 bps over the past few months."

December 7 - Reuters (Jemima Kelly and Gertrude Chavez-Dreyfuss): "Bitcoin rocketed to a lifetime high just shy of $16,000 (11,922.50 pounds) on Thursday after climbing some 60% in just over a week, intensifying the debate about whether the cryptocurrency is in a bubble about to burst. The largest U.S. cryptocurrency exchange struggled to keep up with record traffic as the price surged, with an upcoming launch of the first bitcoin futures contract further fuelling investor interest. Proponents say bitcoin is a good medium of exchange and a way to store value, much like a precious metal."

December 5 - Bloomberg (Natasha Doff): "The chief investment officer of State Street Global Advisors is sounding the alarm bell on short volatility trades. The billions of dollars backing bets that volatility in the stock market will keep sinking lower is 'storing up trouble' for the future, according to Richard Lacaille, CIO of the $2.4 trillion asset manager. Investors will scramble to cover their short positions in the event of a rapid reversal, he said. Even as the CBOE Volatility Index has plunged to its lowest level on record this year, investors have continued to pile money into exchange-traded products that short the gauge."

December 3 - Financial Times (Ben McLannahan): "Big Wall Street banks have begun to rebuild their trading arsenals under the lighter-touch regime of Donald Trump, who has promised to rip up Obama-era rules designed to rein in risk-taking. The likes of Goldman Sachs and Morgan Stanley spent the years since the crisis winnowing their inventories of stocks and bonds held for trading, as new constraints on capital, and new rules such as the Volcker ban on proprietary trades, bit hard. But over the past nine months the trading arsenals of the big six banks have grown by more than $170bn, bringing the total to $1.71tn, the highest level since the end of 2012..."

Fixed Income Bubble Watch:

December 7 - Bloomberg (Carolina Wilson and Dani Burger): "Investors in exchange-traded funds are done with corporate bonds. At least that's what you see in the recent flow numbers. Almost $1.4 billion has fled three popular debt ETFs over the past two days... Among them is the largest ETF tracking high-yield bonds, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which recorded outflows of $715 million, the most since a three-week selloff over a month ago. But that fund isn't alone. The iShares investment grade corporate bond ETF known as LQD saw $424 million of outflows over those two days. And the iShares 1-3 Year Credit Bond Fund, ticker CSJ, saw its largest pullback since June 2014..."

December 5 - Financial Times (Eric Platt): "Nothing helps illustrate the hunt for yield by investors than the re-emergence of an esoteric financial instrument popular in the run-up to the financial crisis. The return of so-called pay-in-kind toggle notes, known as Piks, have caught the attention of investors after the second-largest deal in the US since the financial crisis was wrapped up last month. The $1.3bn offering from MultiPlan, a healthcare technology company, was all the more surprising given the relative absence of toggle notes this year. Such securities allow companies to make interest payments with either cash or more debt, a scenario that duly registered during 2008 when many companies fell into stress and 'toggled' interest payments from cash to extra debt. But in the current climate of meagre fixed-rate yields and low risk premiums, Pik toggles have proven an alluring option as they pay a yield nearly twice as much as the average junk bond..."

December 4 - Financial Times (John Plender): "With Donald Trump set to sign off on the Republican tax package by Christmas, it seems almost certain that the president will be definitively putting an end to the 36-year bull market in US government bonds. With hindsight, we can identify the inflection point as July 5 last year when 10-year Treasuries closed at a rock-bottom yield of 1.37%. The economist Paul Schmelzing, in a paper for the Bank of England that charts the risk-free rate back to the 13th century, points out that this is without historical precedent."

December 6 - Bloomberg (Chris Anstey and Narae Kim): "The great credit party that's taken yield premiums in major markets down around lowest in a decade is probably months away from an end, as central banks normalize monetary policy and the economic outlook softens, Societe Generale SA predicts. 'We expect next year to be a transition year, when the ultra-low yield environment finally starts to lose its grip,' Societe Generale credit strategists Juan Esteban Valencia and Guy Stear wrote... 'The U.S. and the eurozone are heading for an economic slowdown in 2019, and given the rising levels of corporate leverage, this should have an impact on credit.'"

December 3 - Financial Times (Kate Allen): "A $1tn wave of fixed-income debt is set to mature in Europe, the Middle East and Africa in the coming year, posing a significant challenge for investors searching for returns... The debt was raised by investment-grade companies, sovereigns and financial institutions in the aftermath of the financial crisis, when bond yields were much higher than they are now. More than half of the redemptions will be bonds issued by financial institutions, according to... MUFG, with nearly a third coming from corporate issuers and the remainder from sovereigns and related entities."

Brexit Watch:

December 8 - Financial Times (Alex Barker and Jim Brundsden): "Britain has reached a historic deal on its EU exit terms, enshrining special rights for 4m citizens and paying €40bn to €60bn in a hard-fought Brexit divorce settlement that clears the way for trade talks next year. Theresa May, the UK prime minister, and Jean-Claude Juncker, the European Commission president, met in Brussels early on Friday to sign off a 15-page 'progress report' that will allow EU negotiators to recommend opening a second phase of talks on post-Brexit relations."

December 5 - Reuters (Guy Faulconbridge and Kate Holton): "Hours after a Brexit deal collapsed, British Prime Minister Theresa May came under pressure on Tuesday from opposition parties and even some allies to soften the EU divorce by keeping Britain in the single market and customs union after Brexit. May's ministers said they were confident they would soon secure an exit deal, though opponents scolded the prime minister for a chaotic day in Brussels which saw a choreographed attempt to showcase the progress of Brexit talks collapse at the last minute."

Japan Watch:

December 4 - Financial Times (Leo Lewis): "The first time the Bank of Japan governor, Haruhiko Kuroda, dropped the phrase 'reversal rate' into a speech in mid-November in Zurich, currency traders blinked but took it in their stride. The term — referring to a level of interest rates so low it stops stimulating the economy because banks become unprofitable and stop lending — was new to many, left the BoJ's intentions heavily open to interpretation... But when the governor used the same words again two weeks later — this time in the Japanese parliament — it no longer felt quite so safe to dismiss the idea that Mr Kuroda was signalling something..."

December 7 - Reuters (Leika Kihara and Stanley White): "Japan's central bank governor said... changes in the economy and financial system could trigger a hike in the bank's yield targets, a key monetary policy lever, offering the strongest signal to date it may edge away from crisis-mode stimulus. Haruhiko Kuroda also said the Bank of Japan was 'very mindful' of the health of regional banks hurt by its ultra-loose monetary policy, in his first such acknowledgment that the measures of recent years could jeopardize financial stability. While it was too early to discuss specifics of an exit, he said the BOJ's future communication would focus on how to remove quantitative easing without disrupting financial markets."

December 8 - Bloomberg (Yoshiaki Nohara): "Japan's economy expanded a faster-than-expected 2.5% in the third quarter, as a nearly year-long recovery in exports helped fuel business investment. The Japanese economy has grown for seven straight quarters, which now registers as its longest expansion since the mid-1990s..."

Emerging Market Watch:

December 3 - Reuters (Tuvan Gumrukcu): "Turkish President Tayyip Erdogan said... businessmen who attempted to move assets abroad were 'traitors', and called on his cabinet to block any such moves. 'I am seeing signals, news that some businessmen are trying to move their assets abroad, and I call on firstly my cabinet from here to never allow this exit for any of them because these people are traitors,' Erdogan said."

Geopolitics Watch:

December 6 - Reuters (Soyoung Kim and Heekyong Yang): "Two U.S. B-1B heavy bombers joined large-scale combat drills over South Korea on Thursday amid warnings from North Korea that the exercises and U.S. threats have made the outbreak of war 'an established fact.' The annual U.S.-South Korean 'Vigilant Ace' exercises feature 230 aircraft, including some of the most advanced U.S. stealth warplanes, and come a week after North Korea tested its most powerful intercontinental ballistic missile (ICBM) to date... North Korea's foreign ministry blamed the drills and 'confrontational warmongering' by U.S. officials for making war inevitable. 'The remaining question now is: when will the war break out?... We do not wish for a war but shall not hide from it.'"

December 6 - CNBC (Sam Meredith): "A senior U.S. official has cast doubt over whether U.S. athletes will able to compete at the 2018 Winter Olympics in South Korea amid heightened tensions with the North. U.S. Ambassador to the United Nations, Nikki Haley, said the prospect of U.S. athletes participating in February was an 'open question.'"

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